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United States Monetary Policy March 2022

United States: Hawkish Fed raises rates in March; more hikes to follow

At its meeting on 15–16 March, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate to 0.25–0.50%, in line with the Committee’s January statement and our panelists’ forecasts.

The Fed’s decision to raise its rate came amid a persistent surge in inflation from the second half of 2021 and strong economic activity and employment levels. Previous concerns regarding unemployment and the downturn of the economy fell out of focus, as inflation has soared above the target rate of 2.0% and the Russia-Ukraine war has further threatened price stability ahead. This led the Committee to abandon its previous rhetoric on price pressures being transitory and move more aggressively towards curbing inflation instead of passively waiting for it to dissipate.

Looking forward, the Fed asserted its hawkish stance in light of risks to the inflation target of 2.0%, foreshadowing several upcoming rate hikes later in 2022. Reductions in its holdings of Treasury securities, agency debt and agency mortgage-backed securities were also mentioned as items on the agenda for upcoming meetings. The Committee members’ projections from the meeting suggest seven possible 25 basis point hikes in 2022, with some of our analysts even forecasting multiple 50 basis point hikes, and balance sheet reductions as early as the May meeting.

Commenting on the possible scenarios for the upcoming Fed meetings, Goldman Sachs analysts noted

“We now forecast 50 basis point hikes at both the May and June meetings, followed by 25 basis point hikes at the four remaining meetings in the back half of 2022 and three quarterly hikes in Q1 2023–Q3 2023. We have left our forecast of the terminal rate unchanged at 3.00–3.25%. We continue to expect the FOMC to announce the start of balance sheet reduction at the May meeting, but after today’s comments we do not think this is necessarily an obstacle to also delivering a 50 basis point hike in May.”

The next FOMC meeting is scheduled for 3–4 May.

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